Solvency II should not in its entirety be a model for LatAm

Is Solvency II in Europe a role model for the LatAm region? This is the question Dr Winfried Heinen, head of Gen Re’s international life/health business and executive director of General Reinsurance AG, Cologne, will be exploring in a panel discussion on day three of FIDES.

“The claim that Solvency II should be a role model for the world was made by Karel van Hulle of the European Commission who, until his retirement, was in charge of implementing Solvency II in the EU,” said Heinen.

“Other voices have called Solvency II ‘the triumph of actuaries over common sense’. The truth is probably somewhere in between.

“Personally I think that in its entirety Solvency II is not a model for other markets, just because many of its features address topics that are specific to Europe and also because it is overly complex. Having said that, there are definitely some key aspects in Solvency II that would be of use for Latin America as well.”

What will be beneficial to Latin American companies, just as it will be to the European markets, is the focus on risk management and good corporate governance, said Heinen. Of the famous three pillars of Solvency II, pillar two is definitely the one that will add most value to insurers not just from a regulatory perspective, but also in respect of managing the company.

“Then, of course, the region can learn from Solvency II what not to do,” he added. “One lesson the Europeans are learning the hard way is that a fundamental change from one supervisory regime to another takes time.

“Discussions about Solvency II went on for more than 15 years, but in the end, for political reasons, its implementation is being done in a huge hurry. This is requiring enormous resources and putting companies, and the regulators as well, under significant stress.”

Heinen believes Latin America should allow itself sufficient time to implement such a regime—and that Latin America should wait for the Europeans to gain experience with the new system rather than implementing a Solvency II-style system too rapidly.

“Why jump out of a plane with a parachute that hasn’t been tested?” he said.

The biggest challenge for the re/insurance industry in Latin America is that insurance is alien for large parts of society, be it due to a lack of consciousness or a shortage of economic resources, said Heinen. Some progress has been made in the area of microinsurance, but without really having a material impact on insurance penetration.

“That shows that buying insurance is not only an economic issue, but a question of mindset. Unfortunately, private initiatives in a number of markets, driven by the insurance sector, have not changed the mindset so far and most governments have not identified it as an educational topic they should deal with. The latter is particularly regrettable when one thinks of the huge nat cat exposure many Latin American countries have,” he said.

This protection gap is not only a challenge, it is, of course, also a big opportunity. Auto and home owners’ insurance and private health insurance on the personal side have enormous growth potential, but when you keep in mind that only a small fraction of the small and medium-sized enterprises have insurance, there is room for growth there as well.

“I am confident that through the new media new sales channels will come into existence that will do away with the inefficiencies of many of the current sales forces and hence foster growth in insurance,” he said.

From a reinsurer’s perspective, Heinen is particularly concerned about protectionist measures in reinsurance regulation in markets like Argentina, Brazil and Ecuador.

“Apparently the driving forces behind these developments do not understand that restricting the freedom of reinsurance weakens rather than strengthens the local primary insurance industries,” he said.

“These measures limit the local industry’s access to capacity and expertise and unintentionally create concentration risks that need to be, and in a free reinsurance market could be, diversified.”

As Gen Re approaches the 40th anniversary of opening its first office in the region, it continues to follow its strategy of being an underwriting-driven reinsurer who is dealing with clients exclusively on a direct basis.

“Sticking to technically sound underwriting is difficult in the current environment,” said Heinen. “But our focus is on the bottom line, not the top line, so we will not change our policies. We also see encouraging signs that clients give more importance to ‘underwriting their reinsurer’. Against such a background we feel well-positioned.”